The long anticipated, some say most ever anticipated, interest rate drop by the Fed hit yesterday. The Fed in their pretended wisdom or obfuscated ignorance, lowered Interest Rates by 50 basis points which is one half percent (0.5%).
Though some believe this will bring relief to consumers and businesses and even prevent a Recession or worse, I disagree. It will for a time affect the mindset of borrowers until they see that the actual rates they are paying or being offered remain pretty unchanged or only changed to a very minor degree. The hope that mortgages will now come down is a false hope in that mortgage rates front loaded this drop and are already at or very near where they will be for a while. The same is more or less true for auto loans. I expect no change for credit cards and only a minor change for loans and even then just the short term.
The one aspect of the rate cut that I do see is the effect on Stocks. As I type, the Indexes are up big time.
So, is there a reason to celebrate or not? I say not. The metals rallying is a clue. Interest rates being lower is actually Inflationary. Plus, this may also be, as I believe the case, a precursor to the money spigot getting opened up again. THAT IS INFLATION being an increase in the money supply. Of course, the tightened money supply is still effecting the economy and may have some time to play out. My view is that a Recession is till due and this along with throwing cash at preventing one will not work in the long run.
If I am correct, we will see short lived (think election cycle) rises in the Indexes, new all time highs in Gold and a rising Silver price. If oil shoots back up it could be the catalyst toward a renewed Inflation run. How high? Double digits is not out of the question by 2026. Whoever is elected will have very little influence as the US National Debt continues to skyrocket with uncontrolled spending and extremely high interest payments, even with the lowered rates. They ain't going back to zero. Continued Deficits add to the National Debt so even 3% interest on $40T is a huge amount eating up taxes collected and demanding more money printing to buy ever increasing bond issuance.
I suggest that barring a black swan, take your pick, things will seem pretty good for Wall street and investors will be singing Happy Days Are Here Again? That tune will sour. Play the markets with caution, maybe hold some ZROZ or TLT to get the capital appreciation on bonds (the longer end 20-30 years) and stay alert ready to cash out. A sensible thing in this environment is to hold Gold or acquire some as both a hedge and potential capital gain. Be patient.
Good luck to all.
Best,
Donn Marier